Author: dannyquah

Spurious precision and unnecessary jargon: Saying in a talk that “this is a function of that” rather than just “this depends on that”. The latter: Fewer words; exactly the same meaning; “is” is only a weak verb-to-be while “depends”, despite its English meaning, denotes action and therefore carries the greater power.

That, and no one, least of all a real mathematician, is fooled that someone knows their stuff simply by their saying the words “mathematical function”. Or as a beloved TV character once said: “The impact has magnitude equal to one minus the exponential of negative i times 2 pi”.

Ironic if the greatest harm done to Goldman Sachs ends up coming from their diving back in where it had once gotten too difficult for them to do business…

Goldman Sachs Ties to Scandal-Plagued 1MDB Run Deep

Oops, did I say, “diving”? I meant “cultivating”.

Too bad this WSJ article (2016.12.22) is paywalled (but if you can afford it, please go read it there as high-quality journalism needs your support). Unfortunately, however, some might not get to read it for its many good lines, with the WSJ reporting only the facts under an almost Sheldon-esque absence of sarcasm.

So I thought it worthwhile to splice together some of them:

“Investigators have said 1MDB was used by the prime minister as a political slush fund and by associates of his to buy more than $1 billion of real estate, art and other luxuries from London to Beverly Hills, Calif.” “Investigators believe Mr. Low made key decisions at 1MDB, despite holding no official position there, and received hundreds of millions of dollars taken from the fund starting in 2009.” “When the Malaysian fund, which Swiss investigators have labelled a Ponzi scheme, ran into roadblocks in its quest to raise cash, Goldman helped keep the money flowing through bond sales.” “Probes of the fund’s missing billions are under way in several countries.”

“Goldman has consistently said it did nothing wrong and had no way of knowing there might be fraud surrounding 1MDB. The bank has said its main role was raising money it thought would be used for the stated purposes.” “Mr. Low has denied any wrongdoing, as has Mr. Najib, and the prime minister has been cleared by the country’s attorney general. The 1MDB fund has denied it did anything wrong and pledged cooperation with investigations. ”

“Central to Goldman’s 1MDB dealings was Mr. Leissner, 47 years old, an outgoing German who was skilled at getting close to Asian businessmen, according to former colleagues. Some referred to Mr. Leissner, who is married to fashion designer Kimora Lee Simmons,as Dr. Tim, for a doctorate he had from now-defunct Somerset University in Britain.”

“By 2012, 1MDB was struggling with debt. Mr. Leissner advised the fund on a bid to buy some power plants that would provide cash flow. To make the deal, 1MDB needed to raise $1.75 billion, but it didn’t have a credit rating. Goldman suggested the fund find an entity with strong credit to guarantee the issue. Mr. Low, who had Middle East ties, introduced people from Goldman and 1MDB to officials of an Abu Dhabi sovereign-wealth fund, International Petroleum Investment Co., or IPIC.”

“Goldman then got the bonds issued quickly by agreeing to take them onto its own balance sheet, for later sale to investors. The bank has said the risk it assumed in doing things this way justified a high fee. According to the Justice Department asset-forfeiture suits, the bank charged 1MDB $192.5 million, or about 11% of the bond issue. The fee on a deal like that would typically be about $1 million.”

The “deals were approved by five Goldman committees that vet transactions posing financial or legal risk. In doing business with 1MDB, Goldman officials drew reassurance from its status as a state fund with the imprimatur of the Malaysian government and support of the prime minister.”

“At the time, Mr. Najib faced a tough re-election fight, and concerns that he might be tapping 1MDB for money to help him win were discussed openly within Goldman. Mr. Leissner commented to a colleague in early 2013 that he knew 1MDB was operating partly as a political slush fund, according to the now-former colleague. A friend of Mr. Leissner described hearing the same thing from Mr. Leissner about a year later and added that Mr. Leissner also said he was worried some 1MDB money was being stolen for personal enrichment. A person familiar with Mr. Leissner’s thinking said he didn’t hold those views or voice them, calling the notion “revisionist history.””

“Mr. Leissner won praise at partner meetings for the business he brought in. During a late-2014 meeting focused on growth markets, Mr. Blankfein said, “Look at what Tim and Andrea [Vella, who structured the 1MDB bond deals] did in Malaysia.” He added, “We have to do more of that.””

Almost every feature in the modern economic landscape emerges, not through anyone’s design but spontaneously, in order to solve an optimization problem that involves tradeoffs. Why not China’s State Owned Enterprises (SOEs) too?

For all the uncompetitive, lumbering, sluggish, internally inefficient, powerful interests that SOEs represent generally, there is the possibility that they might serve an important social role. How?

SOEs can stabilize employment. By definition, they don’t chase short-term profits, and so even as the overall economy slows, they can keep hiring. In doing so, they maintain employment growth at the margin, and help keep up consumption demand. Conversely, when the economy over-heats, they don’t have to ride the same faddish hiring pursuits as everyone else and aggravate high and increasingly wage-inflating demand for workers. Instead, SOEs can just keep on a slower steady trajectory, and so, at the margin, help reduce over-heating in the economy overall.

This isn’t to suggest that SOEs can be permanently out of step with the rest of China’s increasingly competitive economy, but instead to argue that in the short to medium term, being out of step can be a positive development. Through stabilizing the aggregate economy, SOEs can provide a public good that profit-seeking, market-driven firms and businesses cannot. Counter-cyclical stabilization policy is hardly at odds with sensible modern macroeconomic policy.

The same way that they can help smooth employment and growth over time, SOEs can also help stabilize and reduce inequality across space. Should SOEs re-locate towards the relatively under-developed parts of western China, they need not be daunted by poor infrastructure and transporation links cutting into profitability. Indeed, by such relocation, SOes can help propel the building of those transportation links, and therefore be part of a big-push initiative to rebalance geographically China’s economic development.

So, sure, if your business has been steamrollered by a gigantic State Owned Enterprise, or if you’re concerned about income inequality, you would think SOEs hold back progress and distort market incentives. But post-2008 hardly anyone clings any longer to pure market fundamentalism.

Might the sluggishness and lack of competitiveness in SOEs actually be part of a gigantic emergent mathematical program that seeks to trade off stability and economic efficiency? (in Chinese, 国企存在的意义主要是稳定民心和平衡市场)

My own website contains more public and permanent versions of what gets posted here; it is also there that I blog publicly. However, it is here that I post NUS-specific content (coursework and teaching, notes intended for colleagues and students, and so on), and where I circulate early drafts of materials eventually headed for wider circulation elsewhere.

(This doesn’t keep anyone else from looking at any of this content; it’s just that NUS students and colleagues might, on the margin, find these things faster and consider them more relevant.)